advice re purchase

[annie_b]

Hello everyone!

I am looking at purchasing my first property in Brisbane for $195,000 and am using the PIA software. EIO is in. I dont know what i am doing wrong- if anything... but maybe you can help.

I think i have put in all the details correctly and i amcoming up with a negatively geared property of 58 a week. I have a different analysis software which puts the same scenario at 7 per week positive. As i dont want to have such a high debt per week (for me to carry in my situation) i am confused as to what is the correct case scenario.
Here are the details and i would like your opinion to see if you get the same as me:

property $195k
borrowing 106% 16% from line of credit at 6.25% 90%IO loan at 6.05%
rent is at 220 per week 2% vacancy rate
Income is 45,000 as a single person.
capital growth at 7.5%
loan costs etc will be taken out of the borrowings from the LOC

Thanks for your time in looking at this

Annie B

 

[WillG]

Hi Annie,

Can you indicate the following numbers to help with the calculations:

Expected depreciation on building and fittings
Property managers fees (As a percentage of the weekly rent)
Body Corp fees (if applicable)
Insurance costs (Landlord & Property)
Land tax (if applicable)

 

[sandor]

Hi AnnieB

I ran the numbers through my calculator and the result is much closer to the PIA software, than the other one you used.

income $220pw with 2% vacancy rate= $11,211.20pa

loan expenses (106% of $195,000, assume IO)= 31200 @ 6.25% + $175,[email protected]= $10,617.75+$1,950.00= $12,567.75
Council rates $1,500pa, insurance $300pa, agent's commision (7.5%)=$840.84, altogether expenses=$15,208.59, so there is a yearly $3,997.39 shortfall ($76.87pw). With negative gearing you would get back $1,259.18pa, so it would be only $2,738.21pa in red ($52.66pw).

current income= $45,000
tax on that = $10,555

total rent = $11,211.20
total expenses= $15,208.59
total loss =-$ 3,997.39

new income = $45,000-$3,997.39= $41,002.61
new tax = $ 9,295.82

tax return = $10,555- $9,295.82= $1,259.18.

Other maintenance costs were not included (but might well occur during the year), also depreciation was not included, what can make a big difference.

Hope this helped and if I missed any number, don't be too harsh on me

Sandor

 

[annie_b]

thankyou

thankyou for replying

to answer will's question, i am not sure of the depreciation schedule used. this is a new property and i have yet to see what the depreciation used in hte calculation is. Have to make a phone call about that.

Body corporate fee is 900 pa
property managers fee is 8.8%
insurance cost is 200
no land tax

Sandor, my PIA showed depreciation at 2.5% for building, and the default figures for fittings @ 5850pa. even including this i returned negative 58 yr one and never in the projections did it go positively geared.

I am certain that it is possible to have a positively geared property but no figures i manipulate reflect this even when i triple my income (i wish lol).

Annie B

 

[Les]

G'day people,

I gotta go with WillG on this one. It sounds like you might be forgetting the various "non-cash deductions" that will offset the negative amount you are currently up for.

Borrowing costs are deductible, as are Capital Allowance, and Depreciation of the various items of Plant.

Chuck thoise into the equation, and you may find it comes out with a positive cashflow after all (or, at least, far less -ve than you are seeing at the moment).

Regards,

 

[WillG]

For the sake of simplicity I have assumed your property cost about $100k to build.

This will allow you to cliam $2500 /year on capital depreciation

I ran some calcs through a simple spreadsheet and came up with positive CF of $268 per year after tax.

Notes :
There are probably other expenses that should be factored in.
My figures don't represent a 2% vacancy but you can change this in the spreadsheet.
I also haven't factored in the agents letting fee.
Agents also charge fees to inspect the property at regular intervals
I haven't factored in the proportion of your accountants time to do the numbers on this IP at tax time.

Cheers,
WillG

 

[WillG]

I haven't included rates in the spreadsheet.

I have estimated about $700 per year (general & water/sewerage)

 

[annie_b]

Thanks Will for your spread sheet. The council rates are 1200 pa, body corp is 900 pa. I havent factored in the water & sewage rates How did you work out the tax refund?

Given these values are correct in the area of depreciation, the cash flow looks like it works out to be about 12 per week negatively geared. The property manager thinks we might even get a little more for the rent at 230 per week which changes the scenario to about 6 per week negatively geared.

If i keep the values the same but just add the water & sewage together to make 1900pa, the cash flow changes to negative 18 per week. which is a little more than i wanted as i was aiming for a neutral to positively geared property.

Perhaps this is still a good purchase given its projected good capital growth and its a property I can afford.

Given your experience, what do you think?

Annie

 

[WillG]

Hi annie,

Your tax refund is based on your marginal tax bracket. I believe you are in the 30 cents / dollar bracket. For every dollar your IP costs you, the tax man will give you 30cents back.

example
If your IP costs you $10000 per year (includes depreciation) you will get a refund (related to your IP) of $3000.

You asked if I think the property is good ?

Let me ask you some questions that may help you decide ...

When will the IP become cash flow positive ?

How will the IP help your retirement ?

If you don't go ahead with the purchase, what will you spend $XX per week on you would have been paying for the IP ?

How will owning the IP effect your way of life ? Will you be able to sleep at night ?

My Answer ...

I think the IP stands up if it has the potential for growth you have suggested. I personally don't like townhouses because I see no value in body corp fees beyond building insurance while others like body corps because it 'keep the neighborhood nice'.
When I analyse a potential IP I answer all of the above questions and are most interested in the 'big picture' - How many years the IP will assist my retirement

Cheers,
Will

 

[annie_b]

Well,

As a nurse working shift work, it looks like my earnings may now put me into the next tax bracket due to the penalty loading. (a prediction from a pay slip). So, I changed the tax rate figure to 43.5% as my earnings will be slightly over the 50K by end of financial year.

What a difference that made. The property is now positively geared 11$per week.... didnt change any other value (rates is set at 1900 given water etc 700 and council rates 1200).

Whilst I can figure this out using your spread sheet, I still cant get a picture like this using the PIA software. I think its the depreciation fields I dont know what values to use. I would like to know more than the first years projection even though it looks positive from the start.



Annie

 

[WillG]

You will have to work out your tax refund a bit differently. You can claim a proportion @ 43 cents and the majority @ 30 cents

If your income is $52k

If you were to claim $11k expenses your tax refund would be

0.43 * $2000 = $860
0.30 * $9000 = $2700

Total refund : $3560

I can't help you out with the PIA software as I don't use it.

Note : You are reliant on depreciation to make the IP CF+. Have you factored in the scenario of pay cut or loss of overtime ?

Hope this helps !